Bringing biophysical models into the economic lab: An experimental analysis of sediment trading in Australia

Experimental economics has emerged and matured as a formal method for questioning and testing economic theory and assumptions concerning individual behavior. More recently, experimental methods have been used successfully in an economic laboratory to test alternative environmental policy options. The data underpinning these experiments is often stylized or hypothetical in nature. Ecologists and experimental economists have much to gain by exploring ways to underpin economic experiments with data generated from biophysical models. The study makes a contribution by demonstrating how underpinning experiments with regionally modeled biophysical data may give insights which would not necessarily arise from stylized data. In this study sediment data generated from an Environmental Management Support System (EMSS), a software model of sediment runoff in catchments, was used to populate the players' decision space. The study investigated the relative performance of four different instruments, closed first and second price call tenders, cap and trade and command and control regulation. These market instruments will be compared with the aim of promoting riparian management and reducing total suspended solids exiting a catchment. The study finds that the cost of meeting regulatory requirement of sediment reduction through command and control is less than either first or second price auction. However, cap and trade produced high levels of convergence and production, which moved towards minimizing the cost of achieving the cap reduction level. © 2006 Elsevier B.V. All rights reserved.